RadioShack Signs of Life?
Companies often get hurt for good reasons; in RadioShack's case it's been declining revenue and margins resulting from very stiff competition in retail electronics. Net profit margins that were in the 5-plus% range fell to 1.6% in 2011, and are now negative on a trailing 12 months basis. Free cash flow, which has been positive for several consecutive years, has also gone negative on a trailing 12 months basis.
This was a company that has been difficult to be interested in. As shares fell from the $23 range in October 2010, to $7 the following March, I began to see other value investors becoming intrigued, and taking positions. It simply was not "cheap" enough for me at that point. My view of RadioShack was still sour; I viewed it as the older style electronics store that I'd rarely, if ever, set foot in.
My view on the stock changed when the "unthinkable" happened; it began trading below its net current asset value over the summer. I've been researching and writing about net/nets for many years now, and RadioShack is probably the most prominent name that has ended up in net/net land, a veritable scrap heap of down-trodden companies.
Buying a company below NCAV is no guarantee that you will see upside, but it can be an insanely cheap valuation; especially if the company is able to stop the bleeding, or show some signs of improving fundamentals. RadioShack becoming a net/net meant that many investors had simply given up on the company.
When everyone else is selling, companies can sometimes be punished too severely. That was my take on RadioShack. But this type of investing, which has been described as "dumpster-diving" is not for everyone. RadioShack's downward spiral is an indication that some believe the company will eventually go bankrupt. When that happens, stockholders typically get nothing.
Despite yesterday's move, RadioShack is still a net/net, and trades at about 0.93 times net current asset value. As of the latest quarter end, the company had $546 million or $5.45 per share in cash. However, there is also $749 million in debt, and that's one of the issues that has investors skeptical about the company's future. Still, RadioShack's enterprise value is just $523 million. I'm not sure there are any suitors interested in taking the company over, but it remains a possibility